Life Cover or Life Insurance is offered by either an insurance company or a financial institution such as a bank. The amount paid out on death, disability or severe illness will depend on the monthly premium amount. This lump sum payment will be paid either to a nominated beneficiary, or to the life assured’s estate.
It is important to be aware that most insurance companies contain exclusions in their terms and conditions such as prohibiting payment of a policy, should the person commit suicide within the first two years of the policy becoming active. Condition-specific exclusions, such as for diabetes or cardiovascular diseases, and occupation-specific exclusions such as for high-risk occupations, could also form part of your life policy – therefore, it is important to know what you are covered for, and what you are not covered for.
Over 70 percent of South Africans do not have life cover in place. This is partly due to a lack of financial education and partly due to the assumption that life cover is too expensive. It is worth your while to discuss all your options with a qualified financial advisor.
What are your options?
Risk Cover includes Life Cover, Disability Cover and Critical Illness Cover, depending on your requirements.
Life Cover – this will be a lump sum payment to your beneficiaries or estate in the event of your death. You can choose whole Life Cover, or a term policy (often used when having to insure an outstanding mortgage which has a set term).
Critical Illness Cover – there are several levels of critical illness cover available, but most would cover you for contracting a severe illness or succumbing to a heart attack. It is vital that you know whether your insurance policy would cover you at 100% of the insured amount if you do contract a severe illness, or whether they would pay out a percentage depending on the severity of your illness.
Often, clients are under the impression that they have a certain amount of cover for a critical illness, and only at claim stage are they informed that they will only receive a percentage of the insured amount, due to the fact that their illness is not deemed severe enough. Again, your financial advisor can ensure that you are covered by a product which will not look at the level of severity when claiming.
Disability Cover – this could be in the form of a lump sum that is paid out in the event of you becoming permanently disabled and unable to perform your current job, or in the form of monthly payments (income protection) which will pay out in the case of temporary or permanent disability, depending on the product selected. Disability Cover is linked to your ability to perform your own job or a similar job or not being able to work at all – again, you need to know upfront which of the above criteria applies to your policy.
Who needs Life Cover?
The notion that Life Cover is only needed later in life is a misconception. “Young people often dismiss protection as something for older people,” says Tom Baigrie, chief executive of an independent financial company.
The rule of thumb when considering life cover should be to find out if there is anyone who would be financially affected if you should die, and 2) do I have any debt? If you are single with no dependants and no debt, you would rather look at taking out Disability or Critical Illness cover, to ensure that you do not become a burden on the state or your parents should you become ill or disabled. But if you have dependants, and your monthly salary supports them, life cover is essential to take care of them in case of your death.
Everybody has different needs in life. It is therefore recommended to speak to a financial advisor regarding the various options available. A qualified financial advisor is trained to give advice on your insurance needs, and will do a financial needs analysis to ensure that you are not over- or under-insured. Beware of over-the-phone insurance sales, where your needs are not taken into account.
Remember: it is never too early to take out Life Cover. You cannot take out a policy after you become ill or disabled, unless you accept a policy which comes along with a (usually) lengthy list of exclusions or where the premium has been loaded to make up for the risk you pose to the insurance company.
Even if you start small, just get started! You have nothing to lose by requesting a quotation from a financial advisor.
Retirement Annuities Explained
On retirement the transition is obviously made from contributing/saving towards your retirement to drawing from your retirement funds. This is process is enabled by purchasing a annuity.
There are two categories of annuities
- A guaranteed life annuity and
- A living annuity
Guaranteed life annuity
A guaranteed life annuity will pay a fixed income with annual increases for the period of your life. These annuities typically pay a lower amount owing to the lifetime guarantee. As you purchase this annuity from a single financial institution all of your risk is concentrated with this company and you are entrusting them with you pension savings for what could be the next 20 – 30 years or more.
Another issue with a guaranteed life annuity is that typically all, or most, of your capital is forfeited when you pass away. Should this be within the first few years of your retirement it would have made this a very expensive option!
While a living annuity gives much more flexibility, including the amount that you withdraw every year this option does come with a bit more risk.
The flexibility relates the ability to change you mind in the future with regard in what you are invested in and, depending on your circumstances, the ability to vary the capital/income you draw. These products allow you to nominate a beneficiary so that when you pass away your assets/capital does not accrue to a financial institution but will be paid to either your estate or your nominated benficiary/ies.
The risks relate to having your portfolio exposed to the risks associated with the investment market as well as your longevity i.e. the risk that you live too long! The global life expectancy has increased by 22 years in the past 62 years. If you retire at 60, living to 75 or 95 have fundamentally different funding requirements which a living annuity is not able to manage.
The decision as to which annuity to purchase is critical and the consequences of making an incorrect decision can be significant.
Anyone retiring from a registered retirement fund i.e. retirement benefits that are regulated by the Pensions Fund Act, be that a pension, provident, retirement annuity or a preservation fund, can purchase an living/life annuity. Living/life annuities therefore cannot be purchased with funds classified as a discretionary investment.
Setting up an annuity is relatively easy, but there are a number of factors that need to be considered.
Firstly, you will need to decide whether to commute up to one-third of your retirement fund as cash lump sum or to invest the full amount of your fund in an annuity (keeping in mind the tax implications of the tax on lump sums).
Most investment platforms stipulate a minimum contribution limit of between R50 000 and R100 000 in respect of an initial lump sum. You are also able to make additional contributions provided that the benefit is from another approved retirement fund.
There is no age limit for purchasing an annuity; however, generally speaking, you will not be permitted to retire from your retirement fund before age 55 which means you have the option of purchasing an annuity any time from age 55 onwards.
If you are invested in a living annuity, the policy falls under the Long-Term Insurance Act and therefore your investment is not subject to Regulation 28 of the Pension Funds Act which limits offshore exposure. As such, you can elect to invest 100% of your living annuity assets offshore, depending on your goals and objectives.
The legislation permits you to draw a pension income from your living annuity between 2.5% per year and 17.5% per year of the value of the residual capital. You can choose to draw down on a monthly, quarterly, bi-annual or annual basis, depending on your personal circumstances, and you have the option to adjust your drawdown rates every year on the annuity’s anniversary date.
Once you are invested in a living annuity, all growth including interest income, dividend income and capital gains are tax-free. Any income withdrawn from your living annuity which exceeds the tax threshold will be taxed according to the normal tax tables.
Generally speaking, you can transfer your living annuity to another investment platform and to a different investment strategy with no tax implications and at no additional cost.
Legislation permits you to switch your living annuity to a life annuity, but not vice versa. This is because a life annuity is an insurance policy which is purchased with the capital in your living annuity.
Once you have retired from a retirement fund and invested in a living annuity, the pension interest is zero and your spouse will have no claim against the money in your living annuity. A distinction must be made between:
- the capital invested in the living annuities and
- the right to receive a regular annuity payment from the insurer based on the capital value of the underlying investment.
The capital portion of the annuity reflects on the insurer’s balance sheet and therefore belongs to the insurer. As such, the annuitant only has a contractual right to receive a regular payment from the insurer and the capital value cannot be taken into account when determining the accrual. With regard to the annuitant’s right to receive regular payments from the insurer, the right to these payments is an asset in the annuitant’s estate and can therefore be taken into account when determining the accrual.
The capital in your living annuity may not be attached by means of a court order should you be declared insolvent. However, any income drawn from your living annuity does not enjoy the same protection and may be attached by your creditors.
Reach out to Ubuntu Capital and a professional financial planner will get hold of you to explain everything and discuss any of your requirements.
If you are interested in receiving a quote to purchase a retirement annuity, please click here.
If you are interested in saving for your retirement, please click here
If you would like to get a free assessment of your current retirement savings, please complete our online capture form by clicking here
Financial Emigration – What it is and does it apply to me?
Simply put, financial emigration is the amendment of your status with the South African Reserve Bank (SARB) from “Resident” to “Non-resident”.
This status effects on how the exchange control regulations are applied to you but does not affect your citizenship. Until you formally financially emigrate you are still considered to be a “Resident”. This has resulted in many people, having left South Africa for other countries many years ago, still being considered as a Resident by the SARB because they have not completed the formal process of financially emigrating.
There has been much consternation since an amendment to the Income Tax Act was proposed in 2017 regarding the exemption of foreign income for calculating income tax. As this amendment
came into effect on 1 March 2020 the interest surrounding this amendment has increased fairly dramatically in the run up to the change.
At issue is the application of Section 10 (1)(o)(ii) of the Income Tax Act and the determination of where the taxpayer is considered to be resident – on 1 January 2001 South Africa changed the basis of its tax system from sourced to residence based.
Section 10 (1)(o)(ii) provides that a South African tax resident’s employment income that relates to services physically rendered outside of South Africa is exempt from tax, providing that individual is rendering services for or on behalf of their employer outside South Africa:
- For a period exceeding 183 full calendar days, in aggregate, during any 12-month period (commencing or ending during a year of assessment) and
- In the same 12-month period, must be outside South Africa for a continuous period exceeding 60 full calendar days.
Where the above situation applies to an individual, all remuneration earned in relation to the foreign employment will be exempt.
This situation applies to many “ex-pat” South Africans who are currently working abroad.
The original intention of this exemption was to avoid double taxation on this income. SARS; however, has stated that while this was the intention, it was not meant to provide a mechanism
through which South Africans could avoid paying tax i.e. where work is performed in countries that have zero or low tax rates.
To prevent this SARS has amended Section 10 (1)(o)(ii).
The initial amendment was to limit the amount of exempt income to R1 million but in the budget speech on 26 February 2020 this amount was increased to R1.25 million.
When determining this foreign income, the taxpayer must include the value all benefits received as part of their foreign employment such as accommodation, flights back to South Africa or elsewhere,school fees etc. In this scenario it is conceivable that the foreign income could fairly easily exceed the R1.25 million threshold.
Any amounts in excess the R1.25 million threshold would be subject to income tax in South Africa.
Affected South Africans may still avoid having to pay South African income tax if
- There is a Double Taxation Agreement (DTA) in the foreign country where they employed to provide services which applies or
- They can claim a foreign tax credit in respect of taxes paid in the foreign country on their foreign sourced income now subject to income tax in South Africa (this may not help South
Africans in no or low tax jurisdictions such as Dubai).
While applying a DTA may be an option, the application of the DTA only applies for a particular tax year. This then requires the taxpayer to make a separate application every year – a potentially costly and time-consuming exercise.
The process of financial emigration, whilst more onerous, is a longer-term solution. If required, this status may be reversed at a future time but there are implications if this is this is done with 5 years of the SARB approving the emigration.
While Financial Emigration is an option for individuals who do not intend to return to South Africa, there are costs involved with the process. It is recommended that you speak to a Tax Practitioner regarding the implications of financial emigration to establish if this is the preferred option for you.
Written by: Derek Pettitt, Tax Practitioner and Registered Financial Planner
Get in touch with Derek by filling out the below form:
Saving for your child’s education
A parent wants to ensure the best future for their child. One of the best ways to give your child a head start in life is to help them get quality education.
A lot of South Africans. However, are not saving up for their child’s education. This is mainly due to the challenging economic situation in our country and living expenses. The cost of education rises faster than inflation unfortunately. If education seems expensive now, in the future, it will be even harder to cover all the costs.
If you have or are going to have a child soon, here are a few tips for saving for your child’s education:
1. Start Now
Start saving for your child’s education as soon as possible- if you can, before your child is born. The sooner you start saving, the faster your money will grow and the less you must save monthly.
2. Consider taking ownership of the investment
While it may seem like a good idea to invest money in your child’s name, you may want to keep it in your own name. If the money is in their name, once your child turns 18, they can spend the money however they want- and they may not have their priorities set on education at that stage of their life.
3. Do your homework when it comes to fees
Although private education in South Africa is excellent, the cost to send your child to a prestigious school can be crippling. Decide early on what type of school you’re going to send your child so that you can save accordingly. Remember a goal without a plan is just a wish.
4. Find the best method to pay for fees
Some schools offer a discount if fees are paid upfront for the year instead of monthly or quarterly. This may be a good offer to take up if the discount is a significant amount. On the other hand, you may want to consider whether you should rather invest the money and pay the school fees in monthly instalments. Often, debt is the deciding factor for parents. If you must take out short-term debt, such as credit card and retail card debt, it may cost you more than the rebates offered by the school. There is no such thing as good debt though.
In conclusion start now and have a set plan. Our kids are our future leaders and you want the best for their future.
Written by: Andre Becker, Ubuntu Capital Momentum Financial Planner
Get in touch with Andre by filling out the below form:
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